A Wall Street Journal Article–
There are ways to use IRA and 401(k) funds to finance your start-up business. But it isn’t simply a choice of writing yourself a check. There are significant legal steps. The key is rolling over the money into a corporate retirement account that permits you to invest in the business.
A nonexpert would likely need the help of a financial planner or third-party retirement-plan administrator. These professionals set up a C corporation and establish a corporate retirement account. A person can then roll outside retirement accounts into the corporate plan and invest the money in the company’s stock. Since the person is buying shares of his or her own business, he or she is effectively feeding it money.
Warning: If you’re under age 59 1/2 and you do it wrong, you’ll have to pay taxes on the money you use as well as risk an early-withdrawal penalty.
Tax experts put such investments into a gray area of the law. The Internal Revenue Service says such moves raise legal and procedural issues. While the IRS has issued determination letters validating many of these plans, it is continuing to study the issue. There’s no IRS ruling authorizing the full process.
Advisers are likely to charge several thousand dollars to help set up a plan and levy hefty annual fees. So this strategy makes financial sense only if a person is investing a big chunk of their retirement money in a business.
Since many start-ups fail, it may be unwise to use your retirement nest egg to start a business. Instead, first look to nonretirement assets such to taxable savings and brokerage accounts, reserving at least six month’s worth of emergency savings. Then consider home-equity credit or refinancing, and loans from friends, family, acquaintances and banks.
If you are still employed, you might want to consider a loan from your 401(k). But keep in mind that the loan usually must be repaid before you terminate employment. If you have a Roth IRA, you can take tax-free and penalty-free withdrawals of all contributions to the account that are at least five years old. But you can’t replace the money after it’s withdrawn.